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How to minimise your chances of being investigated

Introduction

Over the past few years the landscape has changed significantly with regards to how the HMRC undertake their tax investigations, and what penalties apply. Under the current regime, a compliance visit is the first step of a tax investigation, however, in May of this year the HMRC announced the commencement of a new trial called the Single Compliance Process to “…improve customer experience and reduce costs…”. Essentially the changes relate to the way the compliance check is carried out (by using a uniform procedure for dealing with a compliance case for all types of tax), though the indicators that the HMRC use to determine whether or not to investigate remain unchanged.

If you get it wrong

For most contractors, when considering the risks of a tax investigation there are four main tax areas that could be targeted by the HMRC; (a) PAYE, (b) VAT, (c) Company tax, (d) Personal tax. A compliance check may involve one, or several of these types of taxes. If you are selected for a compliance visit, and are found to have made errors in your tax return(s) the HMRC will apply a tax-geared penalty where your actions have caused a loss of tax. The tax-geared penalty will be somewhere between 0% to 100% depending on whether the error was innocent (0%) to deliberately concealed (100%). A fixed sum penalty may also apply for various reasons. Further, if the HMRC believe the error was due to not taking ‘reasonable care’ they can go back and review your previous 6 years of returns (and if they think you have deliberately evaded tax, they can go back 20 years).

Avoiding a visit in the first place

While a minority of compliance visits are purely random, most are undertaken because the HMRC think there will be something to find. Greater analysis is now possible due to electronic filing of most tax returns, and because annual accounts are also filed in iXBRL. This format means accounts can be easily processed by the HMRC looking for unusual or irregular transactions. Here are my top tips to ensure you fly low across the HMRC radar;

File your returns on time. It might sound simple, but its very important. Ensure you know your VAT quarterly filing deadlines, your company tax filing deadline, the PAYE filing deadline (19th May each year), and get your personal tax return filed each year by 31 January.

Pay your tax on time. Just as important as item (1) above, make sure the HMRC receive their money on time. Direct debits work great with VAT, and remember tax bills can be paid by credit card. Regardless of improvements in transaction speed between banks, always allow 3 working days for your tax payment to reach the HMRC;

Keep impeccable records – Excellent record keeping is imperative. It shows you are professional in your approach to running your business, and will help answer any queries the HMRC may have regarding any tax or accounting transactions. This includes keeping copies (hard copies or electronic are acceptable) of all your invoices, all your receipts, all your business bank account statements, and any other relevant company documents like share certificates, directors loan agreements, and dividend vouchers.

Take the time to review your accounts. Avoid the temptation to simply rubber stamp what your accountant has prepared for you. If a figure looks unusual contact your accountant and ask them to explain. At the end of the day it’s your company, your tax, and your responsibility. You should explain any large variations in the notes on the return.

Get specialist advice from the outset. I would never suggest a contractor meet the HMRC one-to-one – always have your accountant on hand, or if the compliance visit turns into an IR35 investigation, engage the services of an IR35 specialist;

Don’t cover your tracks. Never conceal anything from the HMRC, and don’t think you can tell half-truths.

Summary

In most cases if your business is selected for a compliance visit it will be because the HMRC suspect you may be doing things incorrectly. If you file your returns on time, pay your tax on time, and explain any large variations to current year figures compared to previous year figures, then you will be sending a strong message that you know what you are doing, that you understand your responsibilities, and that you are running your business in a compliant fashion.